India’s growing role in the global economy

There has been an increase in new export orders for goods and services, complementing buoyant domestic demand in India and driving expansion in total sales and business activity. Qualitative data from the PMI surveys also reveals new business gains for manufacturers and service providers globally.

More broadly, we expect India’s real GDP to grow 6.8% in the current fiscal year, moderating from a high base in fiscal 2023–24. The transmission of the Reserve Bank of India’s (RBI’s) rate hikes between May 2022 and February 2023 is underway and likely to modestly weigh on demand in fiscal 2024–25. Regulatory actions to tame unsecured lending are also slowing credit growth. Additionally, the government’s intended fiscal consolidation will mean a lower fiscal push to growth. Even at 6.8%, India would be the fastest-growing large economy.

The private sector will have to shoulder more investment responsibility as India’s fiscal settings are constrained. India’s net general government debt is elevated at about 86% of GDP, and the government may choose to shore up its balance sheet to build up fiscal buffers.

The corporate sector, on the other hand, has deleveraged in recent years, improving its financial flexibility and ability to pursue capacity expansion.

There are initial signs that the private sector investment cycle is gaining momentum. Government investment in infrastructure and the concomitant revival of the housing sector are crowding in private investments in linked sectors such as steel and cement.

Policy efforts are leading to an improvement in India’s logistics environment and supporting investment. However, India’s logistics performance still trails that of regional peers, and policymakers have deployed industrial plans to support private investment in strategic areas.

Private corporate investment is also picking up in some emerging segments where the PLI scheme has been introduced. Electronics and pharmaceuticals are the two success stories here. Solar photovoltaic manufacturing and advanced carbon composite batteries are set to be the next big-ticket investments under the PLI over the next couple years. That said, PLIled investments are likely to peak in fiscal 2025–26 unless new sectors are added, according to CRISIL estimates. 

CRISIL Research’s assessment of over 700 listed large and midsize corporates — excluding oil and gas, and banking, financial and insurance services — indicates that capital expenditure improved 8% between fiscal years 2020–21 and 2022–23. However, that momentum was not broad based. The capex is calculated as a change in gross block, or the total value of all the assets a company owns.

We expect industrial investments to continue gathering momentum in traditional sectors such as steel and cement, as well as in emerging sectors. CRISIL expects 18%-20% of industrial investment to come from new sectors such as semiconductors, electronics and photovoltaic module manufacturing over the next five years.

The Union Budget 2024–25, presented July 23, maintained India’s infrastructure buildout momentum, with capex budgeted to grow 17.1% in the current fiscal year. Additionally, reduction of import duties on critical minerals and raw materials should improve domestic value addition and may help private investments.

As the role of private corporate investment increases and the government continues its infrastructure buildup, albeit more selectively, capital will remain a key driver of India’s medium-term growth. The contribution of efficiency, or total factor productivity, to growth will also rise, supported by improvements to physical and digital infrastructure alongside declining logistics costs. The competitiveness of India’s industries should also continue to improve, facilitating greater integration into global value chains and attracting foreign investment. 

India’s rising contribution to global growth

Increasing productivity should boost India’s growth, allowing the economy to expand 6.7% on average to the end of the decade. According to S&P Global Market Intelligence projections, the size of the country’s nominal GDP would nearly double to over US$7 trillion by fiscal 2030–31 from US$3.6 trillion in fiscal 2023–24. This would make India the third-largest economy in the world, raising its share in global GDP from 3.6% to 4.5% and lifting its per-capita income to the upper-middle-income group.

Strong external buffers are crucial in the face of growing global risks stemming from geopolitical uncertainties and trade disputes. India’s external buffers are resilient compared with those of other nations, thanks to the country’s sharply narrowed current account deficit (0.7% of GDP in fiscal 2023–24 against 2.0% of GDP in fiscal 2022–23), strong foreign exchange reserves of over US$650 billion and ongoing fiscal consolidation.

On a narrow net external debt basis, which measures an economy’s international borrowing and lending and excludes direct equity and debt, India is a small net lender. This strong position reduces the economy’s vulnerability to capital outflow pressures and ensures resilience in servicing balance of payments liabilities.

The recent inclusion of India’s bonds on global bond indexes should support capital inflows into the economy’s financial markets. With the inclusion, gross portfolio inflows are estimated to be between US$20 billion and US$30 billion over the next two years, which is marginal compared with the size of the overall bond market. Nevertheless, it paves the way for greater foreign participation in local financial markets and may result in more capital inflows in the long term.

Monetary policy: Tricky last mile of inflation 

Persistent food price inflation in the face of rising climate risks has the capacity to constrain monetary policy. Central banks can typically overlook spikes in idiosyncratic parts of inflation such as food. But when food price inflation is persistently high and has a significant weight in the consumption basket, central banks can no longer afford to ignore it, especially if growth momentum is strong. This is precisely the situation the Reserve Bank of India is facing on the domestic front.

In India, the food and beverage weight in the consumer basket is high, at about 45%, when compared with a broad selection of economies. This makes inflation and inflation expectations highly sensitive to agricultural supply shocks.

In fiscal 2023–24, headline consumer price inflation averaged 5.4%, while food and beverage prices rose 7.0% and core inflation was up 4.3%. July data indicated a moderation in food and beverage inflation due to a high base from last year. This, together with declining energy prices, brought down headline inflation to 3.5%, lower than the 4% midpoint of the central bank’s target range. Core inflation has been on a path of moderation since early 2023, but the latest reading in July saw a pickup in year-over-year growth to 3.4%. The RBI has reiterated its resolve to bring down headline inflation to 4% on a sustainable basis. Historical data shows this cannot be achieved without a significant and durable drop in food prices.

Another consideration for Indian monetary policy is the uncertainty over US Federal Reserve Board actions. While the RBI’s monetary policy decisions are primarily influenced by its assessment of India’s economic strength and domestic inflationary challenges, they are still, albeit to a lesser extent, tied to actions by systemically important central banks such as the Fed.

Normal monsoons are expected to deflate food prices, but a durable price reduction will require something more. In addition to monsoons, weather events such as heat waves and unseasonal rains have added a new dimension to food production and its price outlook.

The frequency and scale of these weather events due to climate change have been increasingly evident in the post-pandemic period. In fiscal 2022–23, heat waves and unseasonal rains contributed to a surge in inflation, even though the monsoon season delivered no surprises. In fiscal 2023–24, the effects of climate change that contributed to extreme weather events led to the driest August that India had ever recorded. June 2024 was the hottest month for northwest India since 1901.

Fiscal policy is important in controlling climate change’s impact on food production and supply, and the government can choose to take action via specific interventions. These include upgrading agricultural infrastructure, from production to transportation and storage, and encouraging and incentivizing cold storage and food processing to reduce wastage amid increasing risks to food supply. Complementary policies would include agricultural reforms that enable efficient price discovery.

The Indian government’s fiscal policy stance engenders better coordination with monetary policy to manage inflation. The deficit target for the current fiscal year has been lowered to 4.9% of GDP compared with 5.6% in the previous year. Aware of climate risks, the Union Budget also announced measures to enhance agricultural resilience and improve transport and storage infrastructure, which, if successful, could help lower food price inflation sustainably

Despite cyclical moderation this fiscal year, India is set to remain the fastest-growing large economy and expand its contribution to global growth. India is well positioned to improve its prospects by continuing its infrastructure buildout and accelerating growth-enhancing reforms.

In the current environment, the private sector needs to take the lead on achieving a balanced and sustainable lift in the investment cycle. Equally important is the limiting of food inflation by addressing structural bottlenecks and climate risks, as well as fostering conditions for supportive monetary policy. The Union Budget announcements reflect these imperatives. All eyes are now on execution.